This is my first article on Seeking Alpha. It has been inspired by the Tesla (NASDAQ:TSLA) debate, which has been one of the most vibrant that I have seen on SA. I will focus on the product launch of the Model S, competitive analysis, financial analysis, and stock market dynamics. Many of the figures are estimates, and will be refined in a more detailed analysis later on. So now, without further adieu, I would like to introduce you to The Model S.
The Model S
In a few years, the Tesla Model S could be the best selling fully electric car in the United States. This would be an amazing achievement, as they are competing against the global auto giants. Tesla has a chance to accomplish this by selling cars into a low volume luxury segment, not the mass market that the Chevy Volt/Nissan (OTCPK:NSANY) Leaf are aimed at. What is it about Tesla, and the Model S, that makes me think they can achieve this? Well, it certainly is not the company's current financials.
Tesla's Scary Financials
The company has minimal revenue and significant losses. They have less than $300 million of cash on hand, and are trying to compete with luxury car makers who have access to billions in liquidity. If you looked at the financials alone, you would not touch this stock with a 10 foot pole. However, when you look at the product and management, you should be intrigued. If they can fix the balance sheet, we may be looking at one of the next great American companies.
Model S Product Launch - June 22 - Do or Die
If the launch is a failure, TSLA is no more. Everything for the company, and much for the EV industry, is riding on this launch. The Model S is a premium product at a premium price. It is not comparable to the Volt or Leaf, but rather to the Mercedes E Class or BMW 5 series. It comes at a comparable price-point to the Mercedes/BMW, but purchase price can escalate by $10-$20 thousand when a larger battery is selected (enabling more range). This cost increase for the bigger battery is offset in approximately 10 years through savings in fuel costs. If the buyer of the Model S takes fuel cost savings into account (as many EV buyers do), the costs are basically the same as the above-mentioned competing products for the average driver (high mileage drivers or people in areas with higher gas prices will actually save money over time). For more detailed information, much of this data was taken from teslamotors.com, so anyone can crunch the numbers and come to their own conclusions.
So the question is….why would someone buy a Model S over an E-Class or 5-Series? Here are some of the most powerful reasons (notice that fuel savings is not one of them):
1. Style - It is a very sexy car that will turn heads.
2. Status - It will become a status symbol for the wealthy in Silicon Valley (close to where the factory is located).
3. Patriotism - The car is made in the USA, and will contribute to the nation reducing its dependence on foreign oil.
4. Advanced Technology - This will give the brand allure as it may be viewed as superior to a Mercedes or BMW.
5. New Product - The Model S is a totally new and exciting product, not a refresh of a previous generation like the competing products that other luxury car makers will put out.
I will go deeper into the above reasons in a future article. My main point in highlighting the above reasons is to point out that people will be buying this car because they love it. It will be an emotional connection that closes the sale, as is the case with many luxury brands. After the sale, the product must be up to speed in order to keep the momentum going. It must not let down its first buyers, therefore service will be key.
Sales estimates 20,000 for 2013 with 25%+ gross margin
Elon Musk has put these targets out there, and if they are achieved, we may be on to something very big (the factory capacity is 500,000 cars/year). If these targets are achieved, I think TLSA can make approximately $1-$2 dollars a share in 2013. That puts us at 15-30 times 2013 estimates, and a hit product that still has not gone mainstream yet. At an average selling price of $60,000 per car, that puts Gross Profit (GP) at 300mn. There is probably upside to the GP figure, as the average selling price and gross margin may be higher. Also, keep in mind the market opportunity. In the U.S. alone, a million luxury cars will be sold this year. Globally it is over double that, with some countries having much higher gas prices (advantage for Tesla) than the USA.
Tesla - The Lottery Ticket
What if TSLA sold 100,000 cars a year (10% of US luxury market). If this comes to pass, you are talking about over US$3bn in gross profit, and a ten-bagger stock. We haven't even addressed international demand, where in some countries gas prices are much higher. Of course the key risk factor is a Failed Model S launch, in which the stock goes to $0. I will talk about several other risks in future articles, after Tesla gets through the product launch.
My TSLA Stock Purchase
Believe it or not I bought into this stock (2% of portfolio/$35.6 per share) without even knowing much about the product. I did so because it was one of the most shorted stocks in the market, the stock was making 52-week highs, and a huge product launch was on the horizon. From a portfolio perspective, I bought the stock because I had no high multiple stock exposure. I am very shy to purchase high multiple stocks, so instead I bought TSLA (a no-multiple stock!). In my view, TSLA was a cult stock with a high propensity for a short squeeze based on news flow. I was later shellacked by the market downturn and Abu Dhabi selling out a 7% stake. After the share price dropped, I started digging deeper in order to decide if I should cut my trading losses or hold the position. After some significant research, I came to the following conclusions:
1. The Model S is an amazing product
2. Tesla's business model is highly scalable
3. The company has an awesome CEO and management/engineering team
4. The balance sheet is weak
Balance Sheet - Secondary Offering Coming
The balance sheet is a minor disaster. In order to survive, the company must do a secondary offering. It is highly likely that this offering will be close to the Model S launch, when hype is at a fever pitch. If you want to buy a significant position in TSLA, my advice would be to do so in/after the offering. With that in mind, I am looking to sell my position into a short covering spike (probably at a loss). I will later look to buy back after a successful Model S launch and secondary offering.
I will be following this company very closely in the coming weeks. At this point I feel there will be plenty time to get into the stock, even if the Model S is indeed a very successful product.
Disclosure: I am long TSLA.